Spending our way out

Context: With constraints in the other factors of GDP growth, government spending is the only route through which quick recovery can be ascertained. Government investments in infrastructure will have multiple gains.

Challenges to economy: 

• Declining growth: 
• The global economy to contract by 4.9% this year- The International Monetary Fund (IMF)
• Indian economy has been decelerating for the past eight quarters.
• Declining consumption: Due to the sharp decline of credit supply even after the cleanup exercise by the government and RBI.
• The IL&FS debacle made the matters worse, leading to a strain in the Non-Banking Financial Sector (NBFC) sector which played an important role in fueling India’s consumptions.
• The estimates suggest that the consumption will grow at its slowest pace in 15 years.
• Uncertain economic prospects: further led to reduced lending by banks, wage cuts and limits in spending, forcing people towards precautionary savings.
• Declining Investments: A higher rate of investments is essential for sustainable economic growth, which unfortunately, is declining:
• Broad based utilization levels, represented by RBI, dropped to 68.6% in Q3FY20 from 75% benchmark for new capacity addition.
• Increasing levels of debt and declining growth will drop the ratings and investor sentiments. 
• Declining Trade: Trade has been undergoing several disruptions since 2009:
• Global trade declined by 4.3% in March over previous year.
• India’s limited share in global trade provides little room for exports growth.

Way Forward:

• Increase demand through Government expenditure: 
• Keynesian theory suggests that for aggregate demand to increase, at least one of the following components of GDP needs to be expanded:

1. 1. • 1. Consumption
        2. Investments
        3. Net Exports
        4. Government Expenditure
      • With the first three components under severe strain, government expenditure is the key to recovery.

• Invest in Infrastructure : as it will yield multiple outcomes in growth, employment and generation of long-term assets.

• • • About 1% of GDP spend on infrastructure can boost real growth by 2% while creating 1.3 Million direct jobs – S&P Global estimates.
    • Countries have used infrastructure to provide counter cyclical support to economy at distress: For E.g.

• New deal in the US and Germany’s expansion post WWII debt reduction -1953.
• China’s investments after Global Financial Crisis 2008
• Use National Infrastructure Pipeline (NIP) to aid quicker recovery of infrastructure projects.
• Restructure institutions: Like IIFCL, IRFC and NIIF into one large institution to address their inadequacies in order to allow for their greater leverage.
• Float infrastructure bonds: just like China to accelerate funding.
• Develop bond markets: in the state as well as in local bodies to reduce the risk of the bankers and bring back trust in the system.